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Reading the Tax Reform Tea Leaves

"I feel like we’ve been waiting for tax reform since 1987," said John Gimigliano, principal at KPMG, in his session "Testing the Virtue of Patience: Waiting for Tax Reform" from the VSCPA's Business & Industry Conference on May 12. More cynical readers will note that that’s just one year after President Ronald Reagan signed the Tax Reform Act of 1986 into law, and Gimigliano had a similarly pessimistic view of the possibility of getting meaningful tax reform into law nearly 30 years later.

Two large-scale tax reform plans have come into focus in recent years, from President Barack Obama and former House Ways and Means Committee Chair Dave Camp (R-Mich.) The president’s plan dealt only with corporate rates, while Camp’s plan included individual tax changes as well. Neither one ever went to a vote in either chamber.

The players in potential tax reform are well known: Obama, Senate Majority Leader Mitch McConnell (R-Ky.), Senate Finance Committee Chair Orrin Hatch (R-Utah), Senate Finance Committee ranking member Ron Wyden (D-Ore.), House Speaker John Boehner (R-Ohio), House Ways and Means Committee Chair Paul Ryan (R-Wisc.) and House Ways and Means Committee ranking member Sandy Levin (D-Mich.) But even leaving Obama aside, the Congressmen represent just a small percentage of the 535 elected officials in Congress, each with his or her own electorate, personal priorities and chances at re-election.

"John Boehner was clearly not committed to tax reform last year, and neither was [then-Senate Majority Leader] Harry Reid," Gimigliano said. "President Reagan put a great deal of political capital at risk in 1986. President Obama, while he has said the right things, has not done that."

The relative power of each player in Congress is dependent on the Republicans’ margin in each house. Currently, that’s much greater in the House, where the GOP holds a 57-seat majority, than in the Senate, where they hold eight more seats than the Democrats. And that means Wyden can play a much greater role in potential reform than Levin.

‘Ron Wyden is a player," Gimigliano said. "If Hatch is doing tax reform, he’s going to say, ‘Ron, I need you to get me tax votes.’ Paul Ryan doesn’t need Sandy Levin. Sandy Levin is a smart, capable guy, and if he comes along, they can have their bipartisan, kumbaya moment. But Paul Ryan doesn’t need him."

But Gimigliano pointed out that the more vulnerable members of each chamber are likely pushing back on any potentially controversial votes. That’s an especially big issue in the Senate, where eight members of the Finance Committee are up for re-election in 2016.

"If I’m Pat Toomey [a Senate Republican], ‘endangered’ is a strong word, but he’ll be challenged in Pennsylvania," Gimigliano said. "He’ll tell Orrin Hatch, ‘I’m with you. I ran as a low-tax guy. But what’s more important: having me here in 2017 or passing a tax reform bill that might get vetoed anyway?’ And that conversation is happening over and over with all the other members who are up for re-election."

Just as much of a challenge is the timing of passing a reform bill. The first Republican presidential primary for the 2016 election takes place Aug. 15, and reform is unlikely after that date. Factor in that the last serious tax reform bill to come from Congress took three years for Rep. Dave Camp (R-Mich.) to write, and the prospects for comprehensive tax reform in 2015 look thinner and thinner.

That’s not to say that some small degree of reform isn’t possible, particularly in the area of tax extenders. Several extenders have already passed the House, including provisions for some charitable contributions, small business provisions and the expansion of 529 Education Savings Plans. But the Senate and the threat of a veto from the White House loom.

Last year, the House attempted to make a large group of tax extenders permanent. But before the Senate could vote, Obama said he would veto the bill, and support dried up.

So even with Republicans in control of both chambers, the prospects for tax reform in 2015 look dim. What might be necessary is to change the conversation, and the most promising way to do that seems to be dynamic scoring. Conventional scoring assumes that gross domestic product will remain constant, while the two most prominent dynamic scoring options — the overlapping generations (OLG) model and the more conservative macroeconomic equilibrium growth (MEG) model — factor in potential economic growth.

"You can change the debate around the tax reform and take down a lot of political objections if you use this the way we do here," Gimigliano said.